Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.
Principal Issues: Whether 212(1)(d) applies to payments made by a resident of Norway to a resident of the Netherlands for the rental of a vessel in a bareboat charter arrangement, where, that vessel is used in Canada (by a resident of Canada).
XXXXXXXXXX 2008-026720
Angelina Argento
July 18, 2008
Re: Canada-Norway Income Tax Convention
Canada-Netherlands Income Tax Convention
This is in reply to your letter dated January 29, 2008.
FACTS AND ASSUMPTIONS
1. Owner is a corporation that is a resident of the Netherlands within the meaning of Article 4 of the Canada-Netherlands Income Tax Convention (the "Netherlands Treaty");
2. Owner is a non-resident of Canada for purposes of the Income Tax Act (Canada) (the "Act");
3. Owner does not have a permanent establishment in Canada within the meaning of Article 5 of the Netherlands Treaty;
4. Owner has owned a vessel for a significant number of years;
5. SisterCo is a corporation that is a resident of Norway within the meaning of Article 4 of the Canada-Norway Income Tax Convention (the "Norway Treaty");
6. SisterCo is a non-resident of Canada for purposes of the Act;
7. SisterCo does not have a permanent establishment in Canada within the meaning of Article 5 of the Norway Treaty;
8. Owner and SisterCo are wholly-owned subsidiaries of a Norwegian corporation ("Parent") that is a non-resident of Canada for the purposes of the Act;
9. Since its acquisition by Owner, the vessel has been under a bareboat charter arrangement to SisterCo, the term of which is XXXXXXXXXX years (the "Bareboat Charter Arrangement #1")
10. SisterCo's obligation to make lease payments to the Owner under Bareboat Charter Arrangement #1 exists regardless of whether the vessel is in operation or is off-lease;
11. Manager is a corporation that is a resident of Norway within the meaning of Article 4 of the Norway Treaty;
12. Manager is a non-resident of Canada for purposes of the Act;
13. Manager and SisterCo are related companies within the meaning of subsection 251(2) of the Act;
14. Crewing and operation of the vessel is the responsibility Manager;
15. Since the acquisition of the vessel by Owner, the vessel has never operated in Canadian waters.
PROPOSED TRANSACTIONS
The following transactions are proposed:
1. SisterCo is considering subleasing the vessel on a bareboat charter basis (the "Bareboat Charter Arrangement #2") to an arm's length corporation resident in Canada ("Client").
2. Client will use the vessel to fulfill a contract in the offshore XXXXXXXXXX .
3. Client will contract with Manager to provide operation services.
4. Client will pay rent to SisterCo for the use of the vessel in Canada; and
5. SisterCo will pay rent to Owner pursuant to its obligation under Bareboat Charter Arrangement #1.
ADDITIONAL ASSUMPTIONS
6. SisterCo is not an agent or nominee of Owner in respect of the vessel and will be the beneficial owner of the rents that will be received from the Client in respect of the Bareboat Charter Arrangement #2.
7. The rent paid by SisterCo to Owner pursuant to its obligation under Bareboat Charter Arrangement #1 constitutes "rent for the use in Canada of property".
8. Client is not acting as agent or nominee in respect of the offshore activities carried on in Canada by the Client.
ISSUES
1. Will Client be required to withhold Canadian tax pursuant 212(1)(d) of the Act in respect of payments it makes to SisterCo for the rental of the vessel pursuant to Bareboat Charter Arrangement #2.
2. Will SisterCo be required to withhold Canadian tax pursuant to paragraph 212(1)(d) of the Act in respect of payments it makes to the Owner for the rental of the vessel pursuant to the Bareboat Charter Arrangement #1?
The particular situation outlined in your letter appears to relate to a factual one, involving a specific taxpayer. As explained in Information Circular 70-6R5, it is not this Directorate's practice to comment on proposed transactions involving specific taxpayers other than in the form of an Advance Income Tax Ruling. Should your situation involve a specific taxpayer and a completed transaction, you should submit all relevant facts and documentation to the appropriate Tax Services Office for their views. However, we are prepared to offer the following comments which may be of assistance.
Payments From Client to SisterCo pursuant to Bareboat Charter Arrangement #2
Under Canadian domestic law, rental payments for the use in Canada of any property made by a Canadian resident (Client) to a resident of Norway (SisterCo) can be taxed in Canada under Part I of the Act (pursuant to subsections 2(3) and 115(1) of the Act) where the Norwegian resident is carrying on business in Canada and the rental income is derived from such business.
Section 805 of the Regulations provides rules for determining whether an amount is taxable under Part XIII of the Act, in a case where the non-resident recipient of the amount carries on business in Canada. In general terms, section 805 of the Regulations provides that an amount paid to a non-resident is taxable under Part XIII of the Act if that amount cannot reasonably be attributed to a business carried on by the non-resident through a permanent establishment in Canada. You have indicated in the facts that SisterCo (a Norwegian resident) does not have a permanent establishment in Canada. Accordingly, where a Norwegian resident does not carry on a business through a permanent establishment in Canada, rental payments made by a Canadian resident would be subject to a 25% withholding tax under Part XIII (pursuant to paragraph 212(1)(d) of the Act) unless the tax is either reduced or eliminated by virtue of an Income Tax Convention.
In particular, paragraph 212(1)(d) of the Act provides, in part, as follows:
Every non-resident person shall pay an income tax of 25% on every amount that a person resident in Canada pays or credits, or is deemed by Part I to pay or credit, to the non-resident person as, on account or in lieu of payment of, or in satisfaction of, rent, royalty or similar payment,....
We consider that payments received on a bareboat charter are rent. Consequently, the rent payable by Client to SisterCo pursuant to Bareboat Charter Arrangement #2 will be subject to a 25% withholding tax in Canada unless such amount is reduced or eliminated by the terms of the Norway Treaty.
Rental payments received by SisterCo from Client for the use of the vessel pursuant to the Bareboat Charter Arrangement #2 would generally fall under Article 7 (Business Profits) of the Norway Treaty, unless such payments are covered by another Article of the Norway Treaty, in particular Article 12 (Royalties).
Article 12 (Royalties)
Paragraph 2 of Article 12 (Royalties) of the Norway Treaty states as follows:
"However, such royalties may also be taxed in the Contracting State in which they arise, and according to the laws of that State, but if the beneficial owner of the royalties is a resident of the other Contracting State, the tax so charged shall not exceed 10 per cent of the gross amount of the royalties."
Paragraph 4 of Article 12 of the Norway Treaty defines the term "royalties" as follows:
"The term "royalties" as used in this Article means payments of any kind received as consideration for the use of, or the right to use, any copyright, patent, trade mark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience, and include payments of any kind in respect of motion picture films and works on film or videotape for use in connection with television."
It is our view that the definition of "Royalties" in Article 12 of the Norway Treaty does not include rents paid for the use of movable property (i.e. the vessel) and consequently, Article 12 of the Norway Treaty does not apply to the bareboat rental payments made by Client to SisterCo pursuant to Bareboat Charter Arrangement #2.
Article 7 (Business Profits)
Paragraph 1 of Article 7 (Business Profits) of the Norway Treaty states as follows:
"The profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on or has carried on business as aforesaid, the profits of the enterprise may be taxed in the other State but only so much of them as is attributable to that permanent establishment."
The bareboat rental payments made by Client to SisterCo pursuant to Bareboat Charter Arrangement #2 will fall within Article 7 of the Norway Treaty and will be exempt from tax in Canada provided the profits of SisterCo are not attributed to a permanent establishment which it has in Canada. You have indicated in the facts that SisterCo does not have a permanent establishment in Canada, accordingly, the bareboat rental payments made by Client to SisterCo pursuant to Bareboat Charter Arrangement #2 are exempt from tax in Canada.
Conclusions:
- The definition of "royalties" in Article 12 of the Norway Treaty does not include rents paid for the use of movable property and consequently, Article 12 of the Norway Treaty does not apply to the bareboat payments received pursuant to Bareboat Charter Arrangement #2.
- Pursuant to paragraph 1 of Article 7 of the Norway Treaty, the bareboat payments made by Client to SisterCo pursuant to Bareboat Charter Arrangement #2 are exempt from Canadian withholding tax under Part XIII of the Act to the extent that they relate to the use of the vessel in Canada, since SisterCo does not have a permanent establishment in Canada.
Thus, the payments made by Client to SisterCo pursuant to Bareboat Charter Arrangement #2 are exempt from Canadian tax.
Payments From SisterCo to Owner pursuant to Bareboat Charter Arrangement #1
Paragraph 212(13)(a) of the Act states, in part, as follows:
"For the purposes of this section, where a non-resident person pays or credits an amount as, on account or in lieu of payment of, or in satisfaction of,
(a) rent for the use in Canada of property....
the non-resident person shall be deemed in respect of that payment to be a person resident in Canada."
As noted in the additional assumption above, the rent paid by SisterCo to Owner pursuant to its obligation under Bareboat Charter Arrangement #1, constitutes "rent for the use in Canada of property".
Paragraph 212(13)(a) of the Act simply states that for the purposes of section 212, where a non-resident person (in this case, SisterCo) pays an amount as rent for the use in Canada of the property, the non-resident person shall be deemed in respect of that payment to be a person resident in Canada. Accordingly, as long as the payment is rent for a period when the property was used in Canada, paragraph 212(13)(a) of the Act will apply. It does not matter
- where the rental contract was executed;
- where the rental property was originally delivered to be used;
- whether the rental contract specifies where the rental property was supposed to be used;
- who uses the rental property in Canada; or
- whether the rental payment is dependent on the use of property in Canada before such payment is liable to be paid.
Although the lease or chartering of a vessel itself may not be the "use" of the vessel in Canada by Sisterco, in this case, the vessel was actually used in Canada by a person (Client) who, under Bareboat Charter Arrangement #1, is neither the lessor (Owner) nor the lessee (SisterCo) of the vessel with respect to the application of paragraph 212(13)(a) of the Act. As long as the vessel was used in Canada (it does not matter who used it), paragraph 212(13)(a) of the Act would apply.
Accordingly, paragraph 212(13)(a) of the Act applies to deem SisterCo to be resident in Canada for the purposes of section 212 of the Act in respect of rents paid by SisterCo to Owner for the use in Canada of the vessel. Consequently, pursuant to paragraph 212(1)(d) of the Act, the rent will be subject to a 25% withholding tax in Canada, unless reduced or eliminated by the terms of the Netherlands Tax Treaty. The Netherlands Tax Treaty is the relevant tax treaty to determine the ability of Canada to tax the rent paid by SisterCo to the Owner, since the withholding tax in paragraph 212(1)(d) of the Act is on account of the liability to tax in Canada, if any, of the Owner, the latter being a resident of the Netherlands.
Rental payments received by Owner from SisterCo for the use of the vessel pursuant to the Bareboat Charter Arrangement #1 would generally fall under Article 7 (Business Profits) of the Netherlands Treaty, unless such payments are covered by another Article of the Netherlands Treaty, in particular 12 (Royalties). If Article 7 does apply, such payments are exempt from tax in Canada since Owner does not have a permanent establishment in Canada.
Article 12 (Royalties)
Paragraph 2 of Article 12 of the Netherlands Treaty states as follows:
"However, such royalties may also be taxed in the State in which they arise and according to the laws of that State, but if the recipient is the beneficial owner of the royalties the tax so charged shall not exceed 10% of the gross amount of the royalties."
Paragraph 4 of Article 12 of the Netherlands Treaty defines the term "royalties" as follows:
"The term "royalties" as used in this Article means payments of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work including motion picture films and works on film, videotape or other means of reproduction of use in connection with television, any patent, trademark, design or model, plan secret formula or process, or for the use of, or the right to use, industrial, commercial or scientific equipment, or for information concerning industrial, commercial or scientific experience."
Paragraph 6 of Article 12 of the Netherlands Treaty describes when royalties are deemed to arise in one of the Contracting States as follows:
"Royalties shall be deemed to arise in one of the Contracting States when the payer is that State itself, a political subdivision, a local authority or a resident of that State. Where, however, the person paying the royalties, whether he is a resident of one of the States or not, has in one of the States a permanent establishment or a fixed base in connection with which the obligation to pay the royalties was incurred, and such royalties are borne by such permanent establishment or fixed base, then such royalties shall be deemed to arise in the State in which the permanent establishment or fixed base is situated."
The sourcing rule in paragraph 6 of Article 12 of the Netherlands Treaty sources the rental payment to the country of residence of the payer (SisterCo). Thus, although SisterCo is not a resident of either Canada or the Netherlands, if SisterCo has a permanent establishment or fixed base in Canada in connection with which the obligation to pay the bareboat payments was incurred (and such royalties are borne by such permanent establishment or fixed base in Canada), then pursuant to paragraph 6 of Article 12 of the Netherlands Treaty, such bareboat payments would be deemed to arise in Canada and would be subject to a 10% Canadian withholding tax (pursuant to paragraph 2 of Article 12 of the Netherlands Treaty).
You have indicated in the facts that SisterCo does not have a permanent establishment in Canada. Consequently, the bareboat payments made by SisterCo to Owner pursuant to Bareboat Charter Arrangement #1 do not fall within Article 12 of the Netherlands Treaty as they do not arise in Canada.
Article 7 (Business Profits)
Paragraph 1 of Article 7 of the Netherlands Treaty states as follows:
"The profits of an enterprise of one of the States shall be taxable only in that State unless the enterprise carries on business in the other State through a permanent establishment situated therein. If the enterprise carries on or has carried on business as aforesaid, the profits of the enterprise may be taxed in the other State but only so much of them as is attributable to that permanent establishment."
The bareboat rental payments made by SisterCo to Owner pursuant to Bareboat Charter Arrangement #1 will fall within Article 7 of the Netherlands Treaty and will be exempt from tax in Canada provided the profits of Owner are not attributed to a permanent establishment which it has in Canada.
Conclusions:
- Article 12 of the Netherlands Treaty does not apply since SisterCo does not have a permanent establishment or fixed base in Canada in connection with which the obligation to pay the bareboat charter payments to Owner was incurred. Accordingly, while the bareboat charter payments paid to Owner are "royalties" within the meaning of that term in the Netherlands Treaty, they do not arise in Canada for purposes of Article 12 of the Netherlands Treaty.
- Pursuant to paragraph 1 of Article 7 of the Netherlands Treaty, the bareboat payments made by SisterCo to Owner pursuant to Bareboat Charter Arrangement #1 are exempt from Canadian withholding tax under Part XIII of the Act to the extent that they relate to the use of the vessel in Canada, provided the profits of Owner are not attributed to a permanent establishment which it has in Canada.
Thus, notwithstanding the provisions of paragraph 212(13)(a) of the Act, the payments made by SisterCo to Owner pursuant to Bareboat Charter Arrangement #1 are exempt from Canadian tax.
The application of the Offshore Articles of the relevant tax treaties and the general anti-avoidance rule ("GAAR") may be considered in the type of situation you describe. A determination of whether those articles or GAAR would apply in a particular case would require full knowledge of the specific facts in the case. In reference to the GAAR, if the 2 separate Bareboat Arrangements and/or the separation of the time charter and bareboat activities were created in order to avoid Canadian Part I or Part XIII tax, then GAAR may apply to re-characterize the transactions to eliminate any tax benefit arising from the arrangements.
for director
International and Trusts Division
Income Tax Rulings Directorate
Legislative and Intergovernmental Affairs Branch
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